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CAREER EDUCATION CORPORATION.
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BOSTIC R STEVEN
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Steve Bostic provided the following materials to certain stockholders of Career
Education Corporation on May 9, 2006:
STEVE BOSTIC
Wachovia Plaza
P.O. Box 31046
Sea Island, Georgia 31561
May 9, 2006
Dear Fellow Stockholder,
At Career Education Corporation's Annual Meeting next week on May 18, 2006, you
have a critical decision to make. CEC can continue down its current path, which
has led to multiple regulatory investigations, shareholder lawsuits and, of
gravest concern, the looming potential loss of the accreditation of American
InterContinental University (AIU) by the Southern Association of Colleges and
Schools (SACS) - or you can take the first step towards restoring the company on
a path to greater profitability and value for stockholders.
This election is about integrity and credibility. It is about protecting the
value of your investment in CEC from a management that appears incapable of
operating the company within the required regulatory framework, and it is about
electing directors with the experience, skills and knowledge for CEC to be put
back on track.
In the event you have not already seen them, I have enclosed for you three
recent media articles which demonstrate that the problems at CEC continue to
mount.
o The London Times Higher Education Supplement last week revealed that
CEC's accreditation problems extend beyond the U.S. to its overseas
operations. During the week of April 24, 2006, AIU's London campus
became the first university in history to fail an audit by the
U.K.'s Quality Assurance Agency (QAA). The QAA found "alarmingly
low" standards of student achievement and "misleading" marketing
claims at AIU London and added, "At present, no confidence can be
placed in the soundness of AIU London's management of the quality of
its programmes."
o The Wall Street Journal on Monday reported that CEC has paid the
U.S. Education Department nearly half a million dollars to resolve
government findings of financial-aid violations, and that a
Department of Education report noted "evidence suggesting a
coordinated subterfuge to under-report the effect" of federal
financial-aid revenues and that a CEC school "improperly inflated"
its nonfederal revenues in government aid eligibility reports.
o The New York Times on Sunday discussed how CEC is wasting
shareholder money to castigate me, as well as the current CEC
board's failure to adequately respond to the clear demand of
shareholders for greater accountability at CEC.
It is clear to me that unless CEC is put on the right path, negative reports
such as these will continue.
1
My fellow nominees and I have a plan to solve the problems plaguing CEC and to
restore integrity and value to the company. If elected, we would propose a
course of immediate action to address all of CEC's regulatory and operational
problems and to bring transparency and trust to CEC's relationships with its
students, its regulators, its employees and its shareholders. Again, I ask you
to sign, date and return your blue proxy card. Even if you have already returned
a white management card, you have every right to change your vote by sending in
a later-dated BLUE proxy. Only your latest dated proxy will count.
Thank you for your support.
Sincerely,
/s/ Steve Bostic
Steve Bostic
2
American Intercontinental First To Fail New Qaa Audit
By Phil Baty
The Times Higher Education Supplement (U.K.)
April 28, 2006
Quality watchdogs have named the first university found to be failing under the
three-year-old light-touch audit regime, writes Phil Baty.
The Quality Assurance Agency found "alarmingly low" standards of student
achievement and "misleading" marketing claims at the American Intercontinental
University, London.
Confirming the findings of The Times Higher's exclusive report in January, the
QAA this week published a "no confidence" judgment in the management of the
private institution.
It means that AIU London is the only institution to fail a routine QAA
inspection since the agency was set up in 1997. Thames Valley University was
heavily criticised by the QAA in 1998, but this followed a special investigation
outside the routine inspection cycle.
The QAA's report on AIU London concludes: "At present, no confidence can be
placed in the soundness of AIU London's management of the quality of its
programmes."
AIU London, based in Marylebone, is one of seven AIU campuses owned by Career
Education Corporation, a US private education company. It was providing Open
University degrees under a validation contract at the time of the inspection
last year.
AIU London specialises in business, media, interior design and fashion degrees
and has fewer than 1,000 students. It was not part of the QAA's regulatory
system until it volunteered to join the new regime. But, despite its size and
private status, the QAA's verdict sets a new landmark and demonstrates the
agency's claim to be "light touch, not soft touch".
Geoffrey Alderman, its senior vice-president, is an outspoken critic of the QAA.
He was previously responsible for quality assurance at London and Middlesex
universities.
In its report, the agency calls for "essential" action to ensure that the
management of AIU London's academic standards is fully informed by a "rigorous
and scrupulous" consideration of all external examiners' reports.
External examiners have raised numerous serious concerns about business degrees
for several years, the QAA says. But, despite these strong warnings, the QAA
says that its audit team saw no evidence of an adequate response to the concerns
raised.
The report says that AIU London had a "defensive and insular" approach to
external scrutiny and advice.
The QAA also found that AIU London had falsely claimed in publicity material to
offer UK and US degrees from one programme of study without additional work - or
"two degrees for the price of one", as AIU London describes it.
The QAA found that these claims were used to encourage admissions, but the
position was changed after students enrolled. One student called the claims
"deceptive".
"AIU London must be sensitive to the need not to allow market considerations to
override academic probity," the QAA says.
In a statement, AIU London said that it was disappointed with the QAA's
approach.
The university said that the QAA had previously criticised the accreditation
model employed by the Open University, which, nevertheless, AIU London was
required to run under its validation agreement.
AIU London has since "obtained accreditation from another renowned UK
university" - London South Bank.
Career Education Required to Repay Aid Funds to U.S.
By John Hechinger
The Wall Street Journal
May 8, 2006; Page A3
Career Education Corp., a big operator of for-profit colleges, has paid the U.S.
Education Department nearly half a million dollars to resolve government
findings of financial-aid violations at campuses in Pennsylvania and Arizona,
documents show.
In February, the Education Department ordered the company to return about
$469,000 in federal money because it lacked proper documentation for aid
provided to certain students at the company's Pennsylvania Culinary Institute in
Pittsburgh, agency and company officials said. In April, the agency reached a
settlement with the company's Collins College in Tempe, Ariz., in which Career
Education paid $23,000 without acknowledging wrongdoing.
[Chart]
The disclosures, which come from documents released under the U.S. Freedom of
Information Act, add to the litany of Career Education's woes. The company is
facing government investigations, including one by the Justice Department,
probation of a university by an accreditor and lawsuits alleging poor
instruction, high-pressure sales practices and financial-aid fraud. Amid those
problems will come a proxy fight next week. Shares have lost more than half
their value since their peak in 2004.
Last year, the Hoffman Estates, Ill., company disclosed that the Education
Department was reviewing Career Education's overall management of financial-aid
programs, but released few details. In June, the agency told Career Education it
wouldn't approve any campus expansions or acquisitions until it was satisfied
with the reviews' outcome.
Those restrictions are "substantially still in place today," Education
Department spokeswoman Jane Glickman said in a prepared statement.
Leslie T. Thornton, a Career Education director and former chief of staff to the
U.S. secretary of education, said the department's complaints about Collins and
Pennsylvania Culinary have been "fully resolved." The company says the
department has agreed to consider an application for expanding two campuses.
Career Education, with 97,000 students, runs more than 80 colleges, trade
schools and universities across the country, including the Katharine Gibbs
Schools. The Education Department oversees the federal grants and loans that its
students need for tuition -- and on which Career Education relies for much of
its revenue, which totaled $2 billion in 2005.
Meanwhile, Steven Bostic, who sold a chain of colleges to Career Education in
2001, is leading a proxy fight. One of three candidates running to unseat
directors at the May 18 annual meeting, Mr. Bostic succeeded last year in
getting investors to withhold almost two-thirds of votes from management's slate
of directors. Mr. Bostic, who owns 1.1 million shares, or 1%, of Career
Education, cites the company's regulatory problems for his challenge. Friday,
Institutional Shareholder Services, which advises big investors on how to vote
in such proxy fights, backed Mr. Bostic's slate.
Now, a previously undisclosed 2003 Education Department report said Career
Education manipulated Collins College's financials "to effectively distort" the
true proportion of money it received from federal financial-aid programs. In a
measure designed to prevent fraud, for-profit
schools may receive no more than 90% of their money from federal aid programs or
their students will be cut off from government aid.
The Education Department report noted "evidence suggesting a coordinated
subterfuge to under-report the effect" of federal financial-aid revenues at
Collins. The report said the school "improperly inflated" its nonfederal
revenues by issuing federal-aid checks to some students. The student would then
endorse the check back to the college. That amount would then be counted as
money toward nonfederal revenue.
Career Education called the report's conclusions "wholly unwarranted," telling
the agency that the school was merely returning federal-aid balances owed to
students, who were then properly using the money for expenses.
The company says the $23,000 it paid to settle with the Education Department
pales in comparison with the $55 million in federal-aid money that flowed to
Collins from July 2000 through February 2003 -- the period reviewed. The company
said the department didn't find any violation of the 90% rule. Another Education
Department report, dated May 2005, said Pennsylvania Culinary Institute failed
to establish student eligibility for financial-aid funds for 26 of 30 students
whose files were reviewed by federal examiners for the 2002-03 and 2003-04
school years.
The department also found that the school received federal financial-aid funds
even though students had withdrawn from the institution, were on a leave of
absence or otherwise not enrolled. Career Education spokeswoman Lynne Baker said
that the $469,000 returned to the government represented only 1.3% of the $36.8
million the school received in financial-aid money over the two school years
examined.
In another regulatory problem, last December, the body that accredits Career
Education's fast-growing online American InterContinental University placed the
school on one-year probation, citing concerns about admissions practices,
accuracy of recruitment materials and program content. If the accreditor takes
the next step of withdrawing its seals of approval, students wouldn't any longer
be eligible for financial aid.
Career Education executives say the company is making progress satisfying the
accreditor's concerns.
In late April, a dozen students of the company's Sanford-Brown Institute in
Landover, Md., sued Career Education in Prince George's County Circuit Court in
Maryland. The students, studying for medical programs for which they paid about
$30,000 each in tuition, claimed the company misrepresented availability of
clinical externships required to get an important credential. The company
declined to comment on the suit.
Can a For-Profit College Learn a Lesson?
By GRETCHEN MORGENSON
The New York Times
May 7, 2006
Copyright 2006 The New York Times Company. All Rights Reserved.
A KNOCK-DOWN,drag-out proxy fight, featuring dissident slates of directors,
mudslinging and other amusements, has been a rarity this season. But such a
skirmish is going on at the Career Education Corporation, a for-profit education
company that will hold its annual shareholder meeting on May 18. And the fight
exemplifies why disenfranchised shareholders need much more power in director
elections today.
Career Education, which operates 86 campuses offering career-oriented programs
in cooking, photography, health care and other fields, has had a spate of legal
and regulatory problems in recent years. The company, which also has online
courses, is being investigated by the Justice Department and is cooperating with
inquiries from officials in Pennsylvania, relating to its recruitment practices,
and in Texas, involving whether the academic needs of its students are being
met.
Its American InterContinental University unit has been put on probation by the
Southern Association of Colleges and Schools, and the company is a defendant in
various lawsuits from former employees, students and shareholders. California
regulators have said that some high-pressure sales representatives at one school
misled students on potential job opportunities and career placement services.
All of this has wreaked havoc on Career Education's shareholders, who have
watched the stock fall from its split-adjusted peak of around $70 in April 2004
to its close on Friday of $31.86.
Things seemed to be looking up for the company in early April this year, when it
said the Securities and Exchange Commission had closed its investigation into
allegations that the company had inflated attendance figures. A throng of Wall
Street analysts recommended the stock, saying that Career Education's attempts
to clean up its act were finally bearing fruit.
But on Wednesday, the company issued its first-quarter results. They showed a
fall in enrollment and a reduction in forecasts for the rest of the year.
Unhappy investors drove the stock down 14 percent for the week; the shares are
24 percent below where they were just before the company's announcement about
the S.E.C. investigation.
Given that performance, Career Education shareholders just may be giving the
three directors running on the dissident slate a closer look.
THE man rattling Career Education's cage is Steve Bostic, a former chief
executive of American InterContinental University, an entity he sold to Career
Education in 2001. He is now a private investor and owns about 1 percent of
Career Education's shares.
"I'm concerned that without change there is a huge financial risk for
shareholders, including myself," Mr. Bostic said in an interview. "We think we
can work with the independent board members to do what's right for the company
and do what's right for shareholders."
But Mr. Bostic has been frustrated by Career Education before. Last year, three
proposals he put forth -- to require the company's directors to stand for
election annually, to eliminate the company's poison pill and to allow
shareholders with one-third of the company's stock to call a special meeting --
each received approval from about two-thirds of the stock outstanding. And 62
percent of the company's stock outstanding was voted in opposition to the three
directors standing for election.
In response, Career Education appointed two new independent directors,
terminated its poison pill and instituted stock ownership guidelines for senior
management and the company's directors. Still, Mr. Bostic noted, Career
Education's top executive and all of its directors own fewer shares in total
than he does.
Career Education officials are spending shareholders' money to castigate Mr.
Bostic. The company has taken out full-page newspaper advertisements, and its
chief executive, John M. Larson, sent a letter to shareholders last month urging
them to reject Mr. Bostic's slate. "We do not believe it is in your best
interest for our momentum to be interrupted -- or worse, potentially permanently
impaired -- by distractions from Steve Bostic, a dissident who owns
approximately 1 percent of CEC's stock and is choosing to become a perennial
agitator against your company, management and board in order to forward his own
self-serving agenda," the letter said.
Mr. Bostic -- and anyone who is ringside for this match -- is learning firsthand
how hard it is for shareholders to hold directors accountable when the companies
they are supposed to oversee go off track. On Friday, he said that by the time
his campaign is over, the cost could approach $2 million. He estimated that
Career Education was spending more than double that to defend against his
director slate.
A company spokeswoman, Lynne Baker, said in a statement that if one-third of the
stockholders could call a special meeting, it would be "very disruptive" to the
company's business.
As for the money the company is spending to battle Mr. Bostic, she said: "The
board and the company will utilize the company's resources to assure that the
best interests of the company and its stockholders are fully protected." She
added that Mr. Bostic has said that if he wins, he will ask for reimbursement of
his expenses.
Richard C. Ferlauto, director of pension and investment policy at the American
Federation of State, County and Municipal Employees, said: "One of the largest
obstacles to director accountability is that shareholders have limited ability
to challenge boards because the companies control the treasury."
Mr. Ferlauto is the author of a proposal that would have forced companies to
reimburse reasonable costs incurred when a shareholder contests the election of
a director or group of directors. The proposal was voted down in recent weeks at
three companies -- American Express, Bank of New York and Citigroup -- but Mr.
Ferlauto said his organization would bring back a similar proposal next year.
In the face of Mr. Bostic's campaign, Career Education has proposed
declassifying its board by 2008 -- meaning that all directors must stand for
election every year -- and proposed allowing stockholders to call a special
meeting with a two-thirds vote, far more than the one- third vote that a
majority of shareholders favored last year. Career Education has also adopted a
majority voting provision, requiring that directors receive support of more than
50 percent of votes cast to be re-elected, and has appointed another independent
director.
"Negotiating concessions is not the same thing as respecting shareholder
rights," said Gary Lutin, an investment banker at Lutin & Company and an adviser
in corporate control contests. "When a company's board doesn't respond to a
clear message, whether it's a shareholder vote or evidence of misconduct, it
means that every single member either supports or tolerates irresponsibility.
And if shareholders don't make use of their rights to replace all the
irresponsible directors, then it's the shareholders themselves who are
tolerating irresponsibility."
SO where do those shareholders stand on this matter? Only time will tell. But
last year, several institutional shareholders voted for the three directors from
whom a majority of owners withheld support. Wellington Management, Northern
Trust and Federated Investors were among those supporting the directors.
Wellington and Northern Trust do not comment on their proxy voting practices.
Federated did not return a phone call seeking comment.
Mr. Bostic said: "The problem is, the individual shareholder has got to take
this on and it really shouldn't be that way. Most people don't have the passion
and energy to do it. But major institutions do not pursue actions against a
company. They vote with their feet and just leave, and that's bad for the rest
of the shareholders."
We shall see how they vote this year.
Chart: "Focusing on Sales"
The number of recruiters at Career Education's schools has soared while the
number of job placement advisers has not.
Graph tracks the number of recruiters and job advisers from 2001 to 2005.